If you follow the financial markets at all, you’ll no doubt have stumbled across the terms ‘bull market’ and ‘bear market’. In a clear-cut financial world, categorised by methodical charts and precise numbers, these are perhaps the only symbolic terms you will hear.
Because these terms are so broad, they are relatively simple to explain. To summarise, bull and bear markets are common analogies that represent the overall mood of the stock market. Respectively, a bull market is categorised by optimism, while a bear market is classified by caution. They can also represent the general upwards or downwards trends that occur in currencies, bonds, real estate, commodities, or a certain subset of stocks.
But you may be wondering, what does ‘mood’ really mean in practical terms? If so, this is the article for you.
When you break down what a ‘bull market’ actually is, you’ll find that it has a lot to do with investor confidence. For example, if you’re watching a football match with your family, and your team has scored more times than the opposition, you’re likely to believe that they will continue to play well. And more than likely, you’ll be confident that they are going to win. The atmosphere within your living room, much like in a football stadium, is of overwhelming optimism.
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This feeling is what characterises a bull or ‘bullish’ market. During a bull market, investors are optimistic about the current state of the stock market, and are confident that the positive conditions will continue. Except unlike a football match, this optimism can last for months, or even years.
In practical terms, bull markets are generally recognised when stocks rise by 20% or more. This usually occurs after stocks have declined by 20%, and before they decline by 20% again after the bull market is over. This definition is widely accepted.
But as it’s difficult to predict when the trend will turn, bull markets are usually only identified after they have already begun. In other words, the dates of a bull market’s beginning and end can only be known in retrospect.
However, there are a few indications that a bull market might be on the horizon. These include strong Gross Domestic Product (GDP), low unemployment, high share trading, and an increase in corporate profits. When all of these things occur together, this indicates to investors and the general public that the economy is strong and that now is a good time to buy stocks. This is why during a bull market we will see increased numbers of Initial Public Offerings (IPOs). For example, in 2008, during a bear market, there were only 31 IPOs in the US market. However, in 2014’s bull market, there was 275 IPOs.
Another sign that indicates we are in, or about to experience, a bull market is positive financial commentary. When leading economists and financial writers believe the economy is going strong, their articles will reflect this. In turn, this instils confidence in the public and can result in higher levels of stock or asset purchasing.
What are some examples of bull markets?
There are a few good examples of widely recognised bull markets in financial history. The first is the period before the Global Financial Crisis (GFC) of 2007. In this instance, the bull market began in 2003 after stocks began to rise significantly after bottoming out in 2002. This bull market lasted four years and reached its peak in 2007, when the S&P 500 index reached an all-time high, before ending when the GFC began that same year.
Another pertinent example is the tech boom, or as some like to call it, the ‘dotcom bubble’ of the late 1990s. During this period, new internet and technology companies were popping up every week, and driving investors to buy, buy, buy. As a result, the value of the NASDAQ, home to many of the biggest tech stocks, grew from 1,000 points in 1995 to more than 5,000 in 2000. But in March of 2000, the markets crashed from their dizzying heights, nearly $1 trillion was wiped off the NASDAQ in the span of a month, and a bear market began once again.
Some would argue that a similar pattern has occurred with cryptocurrencies. Late in 2017, we saw bitcoin, the star crypto, hit a high of US$19,000. During this cryptocurrency bull market, there was massive hype around cryptocurrencies and the technology behind it, called blockchain. The fact that the prices of these investments were growing exponentially was covered heavily by the media, and this drove prices up further. But once 2018 began, the hype, along with investor confidence, died down considerably. It now appears that the crypto bull market has ended, with bitcoin having fallen over 48% to around $6,000, at time of writing. Because this decline is over 20%, most would argue that cryptos, and bitcoin in particular, have entered a bear market.
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These are good examples of the team mentality that drives bull and bear markets. As you can see, the mood of the stock market has a tangible impact on how people invest, and the success of particular industries and stock subsets.
Investing during a bull market
During a bull market, investors tend to be looser with their money and invest more than they usually would in the hopes of making large gains. Although bull markets can be a great time to invest, it’s easy to get overwhelmed by the hype. Much like investors, raging bull markets can behave irrationally, and can also end at any time. This is why it’s important to always consult a financial expert whenever you invest, to make sure your investments align with your personal financial situation. And as we always say here at Markets & Money, only invest what you can afford to lose.